Understanding the Govt: Part 18: Black Money and Black markets

“Aunty, what is Black money? What is the black market? I keep hearing so much about it. Why is it said to have been stashed away in Swiss banks?”

“Raju, I am glad you asked! Indeed when I was a child, I thought black money referred to the colour of the note or currency kept in some black box! Ha-ha!

To understand these, let’s assume a village ruled by a good king, with a population of 1000. He has a small army of 50 horsemen, and 50 soldiers and a small government with few officials.

Now, salaries have to be paid to the army and the officers? In addition, there will be other office expenditures too? To maintain all these, the king did what all other kings used to do, that is, collect a share from what the citizens produced. This share collected by the king or his government is generally called as Tax.

This was collected in the village market, when the citizens came to sell their grains or products they manufactured. This was called as ‘sales tax’. The king got Rs. 60,000 in this.

Meanwhile, the king came to know that, there are some items that were not produced in his village, but imported from neighbouring villages that were also sold in the same market. The king imposed a tax on them too. This was called as ‘customs duty’. This gave him Rs. 20,000.

The king also came to know that some items manufactured in his village were not sold in his market, but taken out of the village to be sold to other villages. So, the king taxed them at the place where they were manufactured. This was called as ‘excise duty’. This gave him another Rs. 10,000.

Then the king also taxed the rich people in his kingdom. This was called as ‘Income tax’. This gave him Rs.10, 000. Thus he got a total of Rs.1 lakh, and his revenue and expenditure was thus balanced. He could run his government efficiently and keep people happy.

But, the following year, a problem arose. The income came down to just Rs.70, 000. The worried king tried to find the reason. The reason was simple: his officers showed records where sales in the market had dropped. But, his intelligence department said that, production had actually increased, but it’s not coming for sale to the market!

It meant that some of the products were being sold secretly outside the market. What was sold outside the market was not known to government officers, hence not taxed, and thus the government lost the tax! Besides, absence of correct information about the quantum of produce and sales, led to wrong policies from the govt.

So, the king sent his officers to search and arrest all those who sold products outside the market. It was a difficult task, as people sold it secretly in every place possible, like their own homes, fields, roads etc. All these illegal trades happen in secret and is called as ‘black market trade’.

Thus ‘black market’ is a collective term used to describe any location, where any illegal transaction happens. It could be any place, including   homes, offices, even open roads or cars where such illegal deals are struck and goods exchanged!

The unaccounted money that is earned in such transactions is called as ‘black money’! Black money is nothing but normal money, but is earned by illegal means by cheating government officials and accounts.

The money earned in this manner cannot be deposited in the bank, as the government can verify the bank account and easily identify illegal money! So this black money remains as cash only!

But, soon, the black marketers started sending the money to banks outside the village, which was beyond the control of the king, where no one asked for accounts. One such ‘village’ is Switzerland, where the source of bank accounts are not questioned, and hence many black marketers have deposited their cash there.

A few black marketers, make false entries in their account books, and show black money as legally earned money. This is referred to as ‘money laundering’. If this false accounting is done involving someone from another country, then it is referred to as ‘Hawala transaction’, where our black money is exchanged for currency of another country.

Now you understand ‘black money’ and ‘black market’ issues, Raju?!”

“Very well Aunty! Can government not stop this black marketing and black money?”

“It’s very difficult Raju. Can the government monitor 24x7 what every person is selling or buying? So, as long as people transact without billing or accounting, there will be black money. Therefore, unless people demand a bill for every sale or purchase made, black money can’t be controlled.”

“Does it mean that in any transaction we have, we should insist on bill and not do anything without bills?”

“Yes Raju! Because, every bill generated is a document and it helps government officials calculate taxes due correctly. For every bill not given, some black money is created!

What imposes a danger to the country is that such black money can be used to buy from mercenaries, items  that are banned by government like  guns, illegal drugs etc. Now do you realise the dangers of having black money in the country?

“Oh yes Aunty! I understand. From today onwards I will do my bit to reduce black money. I will insist on being given a bill for every transaction, Aunty!”

Vani aunty smiled at Raju. She wished that every youngster in the country does the same.